New Keynesian theory implies that which of the following reduces firms' incentive to adjust their prices?
A) a downward sloping aggregate demand curve
B) the required reserve ratio
C) menu costs
D) none of the above

Question

Quizplus · Accepted Answer

New Keynesian theory emphasizes the presence of menu costs, which are the costs associated with firms adjusting their prices. These costs make it less desirable for firms to constantly adjust their prices in response to changing conditions in the economy, resulting in sticky prices. Therefore, option C, menu costs, reduces firms' incentive to adjust their prices. Option A is incorrect because a downward sloping aggregate demand curve does not affect firms' incentives to adjust prices. Option B is incorrect because the required reserve ratio is a tool used by central banks to regulate the money supply, it has no direct impact on firms' pricing decisions. Option D is incorrect because one of the main features of New Keynesian theory is the presence of sticky prices.

New Keynesian Theory Implies That Which of the Following Reduces